Remove clause in FRDI Bill that has created panic among bank depositors.

All India DRDO Technical Officers' Association (AIDTOA) demands that Government's assurance that depositors' interest in case of a bank going down under would be fully protected should be clearly and unambiguously spelt out in the Financial Resolution and Deposit Insurance (FRDI) Bill and a clause that seeks to treat depositors as other creditors and shareholders for bail - in must be removed.
The panic among the bank depositors has arisen largely due to "bail - in" provisions in the FRDI Bill, something being tried for the first time in Indian financial markets. The intention seems to be that let the shareholders and other stake holders, which include even the depositors (above the limit of insured amount) be responsible for saving a financial entity.

The government's assurance notwithstanding, sub - section 7 of Section 52 of the proposed law clearly says that the ''bail-in'', to which depositors have strong objection to, shall not be applicable to deposits to the extent only covered by insurance. As of now, the deposits are covered only up to Rs 1 lakh, which is a measly sum for millions of middle class families which have kept their life time savings in bank deposits.

The sub-section 7 of section 52 reads as follows: " The bail-in instrument or scheme under this section shall not affect— (a) any liability owed by a specified service provider to the depositors to the extent such deposits are covered by deposit insurance;".

In the Indian context, the concept of ''bail in '' especially by depositors should be completely done away with and their monies in the banks have to be protected at any cost. "Otherwise, the trust in the banking system runs the risk of being eroded and the savings by the households would find way into unproductive avenues like real estate, gold, jewellery and even in the unorganised and informal financial markets run by unscrupulous people.

Middle class families and especially those the pensioners, other old aged people have no social security and the bank deposits are the only financial security out of their life time savings. In any case, the rising cost of health, which is mostly available in the private sector, is hurting this class. Any move of ''bail - in " must be avoided.

The FRDI Bill lists those to be protected, in the event of a bank being in a critical condition, in order of priority; and uninsured depositors come fifth in this list. Even in their case, no doubt, the government claims that they would not lose their deposit value; rather their deposits would be converted into equity. In other words, bank are supposed to recapitalise themselves, when they are in a critical condition, by using depositors’ funds under this Bill, rather than by using budgetary resources as now. But this, apart from being of little consolation to depositors, provides a surreptitious route to privatisation of public sector banks.

It is of little consolation to depositors, because the value of such equity will fall precisely when the bank is in such a critical state that deposits have to be converted into equity; the depositors therefore will lose much of their wealth anyway. Additionally, they are likely to sell off this equity to private corporate entities to get back at least a part of their money, and this will mean a privatisation of public sector banks. A bunch of government nominees on the Resolution Corporation in other words can so orchestrate a public sector bank’s financial credibility that it can pass into private hands, and even into private corporate hands at throwaway prices, without the parliament coming into the picture at all, and entirely at the whim of the executive.

Money in both its forms, currency and bank deposits, is now no longer going to be considered a safe asset to hold. Since the FRDI Bill also covers State-owned insurance and other financial companies, their liabilities too, like bank deposits, would lose their attractiveness for numerous small wealth-holders. In an economy in which people’s confidence in money and these other financial assets is sapped, assets like gold or land or physical commodities become the favoured forms of wealth-holding, because they are considered comparatively “safe”. A shift from money to these latter assets constitutes a retrogression in economic terms.

Currently all deposits upto Rs 1 lakh are insured by banks themselves, so that there is no risk of loss to these depositors in the event of a bank failure. The Deposit Insurance and Credit Guarantee Corporation, a subsidiary of the Reserve Bank of India, which covers such depositors is proposed henceforth to be wound up; and no other institution has been suggested in its place in the bill.

More importantly, however, it is not just the existence of this Corporation that instilled confidence among depositors about the safety of their deposits with the nationalised banks; it was the fact that the banks were government-owned, the conviction that the government would never let these banks fail. It is this confidence which made millions of depositors, especially pensioners and senior citizens, hold their wealth in the form of bank deposits, even though such deposits offered comparatively lower rates of return than shares, mutual funds and many other assets. This confidence will now disappear.

To present a bill in parliament that is sought to be justified by a presumed conflict of interest between the “tax payer” and the “depositor” which can only arise in an eventuality that is nowhere on the horizon, and that can be prevented from arising anyway if we are careful, is not just absurd; it is actually quite mischievous.

It is ironical that the government, instead of announcing measures whereby the corporate defaulters on bank loans, who reportedly account for 75 per cent of total NPAs, are made to pay for their misappropriation of depositors’ resources, is announcing measures whereby the depositors would be made to pay for such corporate misappropriation! This is a blatant attack on crores of common depositors who save their lifelong earnings in bank deposits. This only helps the banks and the financial institutions to recoup their health at the expense of the depositors. While these banks have given humongous loans to the corporates which are not being returned, the consequent loss to the banks is sought to be made up through savings of crores of depositors.

 FRDI Bill 2017 proposes a bail-in provision.  In effect, this is as simple as forcing the depositors to absorb the losses of the bank. Pensioners and other small depositors who have kept their hard-earned savings will be forced to pay for the corporate delinquency and cronyism of the government which often forces the banks to go easy on big corporate debtors.  What is most cruel that once the RC decides on such bail-ins, the depositors will not even be in the knowledge, let alone consenting!

This is not fictional. In Cyprus, under similar conditions depositors had to bear 47.5 per cent of the uncovered amount in reality.

From Vijay Mallya to Anil Ambani, from Lalit Modi to Gautam Adani – we are all witness to the obnoxious episodes which have brought out the reality behind the rhetoric of ‘crusade against corruption’.   The promised Rs 15 lakh never materialised; but now hard-earned savings of Rs 15 lakhs which was secured in PSBs’ custody to be withdrawn for a daughter’s marriage or a son’s higher education, may actually turn out to be Rs 1 lakh! This is only what FRDI Bill proposes.  Could irony be crueler?